Our thoughts about the situation that has developed on the US stock market after a strong drawdown in October.
1) such a blow to the long-term uptrend, although it has not yet developed it formally (we are speaking about the S&P-500 and NASDAQ-100 indices), but caused substantial damage that is unlikely to be easily absorbed and ignored.
2) most likely, the market will show new minimums during 2019, which may be another 10-20% lower, depending on the index and industry
3) however, the current drawdown has led to a number of factors that indicate extreme short-term oversold, such as:
— extremely high level of fear for the week: https://money.cnn.com/data/fear-and-greed/
— the value of the RSI indicator on the weekly chart has reached a level below 30% for the first time since 2015
— a positive divergence has been formed on the daily chart of the indices, in which the new minimum of the price was not confirmed by the new minimum of the indicator (see the chart above)
— more volatile Nasdaq and emerging markets indices did not show new lows relative to the S&P-500 index
— the risk appetite in the credit market, expressed by the ratio of high-yield and highly reliable bonds, remains in a clear uptrend (unlike, for example, from 2008).
4) therefore, before going to the new lows, the market is likely to demonstrate a good tradable rally (anything can happen from Apple’s reporting to M&A activity or the seasonal factor after the November elections in the USA)
5) everything said above is, of course, not a guarantee, but only a subjective baseline scenario until the end of the year
6) if it is implemented, this does not negate the fact that at the beginning of next year it will be necessary to move to a more conservative positioning of portfolios
7) for truly long-term portfolios, the current correction is useful, as it has already led to an increase in the expected stock market returns over the next 10 years by about 1% per annum. A decline in the market in 2019 by another 10% will increase this expected return by about the same. The profitability of the bond market, as usual, is as close as possible to the yield to maturity of 10-year Treasures.